Stock Market’s Movements and Reactions

Investors reaction

Listen to this postMarket efficiency remains inconclusive for many reasons, but one of them is stock price overreaction to information (Ball, 2001). The “Recency Theory” state that traders overestimate recent information and become too optimistic when the firm is winning and too pessimistic when the firm is losing, therefore the traders tend to overreact to recent information (Offerman & Sonnemans, 2004). The “Hot-Hand theory” states that the past winning or losing record of a firm will convince the traders to overvalue or undervalue the firm thus overreact to the information (Offerman & Sonnemans, 2004). A study by Ma, Tang, & Hasan (2005) selected 852 stocks (between 1996 to 1997) and found strong evidence of price reversal after two days of stock price overreaction. The study suggest constructing a strategy to predict the price reversal to gain profit from the overreacted price margin. The above theories and study would be a good research topics for exploration.

Econometric is defined by Encyclopedia Britannica as “the statistical and mathematical analysis of economic relationships” (“Econometrics,” 2009) such analysis use statistical techniques like linear regression to find the relationship between two economical variables. The econometric techniques are useful in finding the elasticity between commodity price and customer’s demand.  Another use of the techniques would be for production cost. In production cost the technique test the relation between the firm’s output and production factors like cost of labor, rent, capital and machinery.

Daniel Gross author of the book “Dumb Money: How Our Greatest Financial Minds Bankrupted the Nation” stated that economists and business leaders are realizing that economic models (like econometric) are helpful to predict the future when enough past data is available; but they fail to predict when major turnaround in the past performances occur. Daniel calls the phenomena as “pro forma disease” when economist depend too heavy on the data to predict the future. Daniel gives an example when a market is growing 10% for the past 4 year, the economist would predict another 4 years of 10% growth. Daniel claims that many economical models use resent years data without incorporating enough past data to that shows major turnarounds in the economy.



Ball, R. (2001). The theory of stock market efficiency: accomplishments and limitations. In The new corporate finance: where theory meets practice (3rd ed., pp. 20-33). New York: McGraw-Hill Irwin.

econometrics. (2009). In Encyclopædia Britannica. Retrieved February 28, 2009, from Encyclopædia Britannica Online:

Gross, D. (2009, February 27). Slate on The Washington Post. Retrieved February 28, 2009, from The Washington post Web site: http:/​/​​wp-dyn/​content/​discussion/​2009/​02/​26/​DI2009022602876.html

Ma, Y., Tang, A., & Hasan, T. (2005, Summer/Autumn2005). The stock price overreaction effect: evidence on NASDAQ stocks. Quarterly Journal of Business & Economics44(3/4), 113-127.

Offerman, T., & Sonnemans, J. (2004). An experimental investigation of recency and the hot-hand effect. Scandinavian Journal of Economics, 106(3), 533-554.

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To Hedge Or Not To Hedge…?

Exchange rate

Exchange rate

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Hedging is trying to reduce the risk in the commodity price fluctuation. A factory may need raw material to produce widgets. The raw material could be imported from different country using different currency. The price of the material and the currency can change during the year. The factory can cut the risk of price fluctuation by buying the foreign currency now, or buy the full amount of raw material and store it in the warehouse. By this action the factory would secure the raw material at the market value now and continue its production at the calculated material price. The change in future prices should not affect its production or profit margin. This is called hedging and can save the company from unnecessary lose due to price fluctuation.

Currency hedging is required to manage the volatility in foreign exchange rate. Daimler-Benz (DB) reported its largest market loss in its 109 year history because of the dollar exchange rate change (Stulz, 2001). The lost was caused by Daimler-Benz management decision of not hedging although one of Daimler-Benz‘s subsidiaries has 16 billion Deutsch Marks in dollars that decreased 14% in value against the Deutsch Mark (Stulz, 2001).



I thought of adding some useful definitions to impress you! Forward currency markets enable the companies to lock the buying and selling exchange rate by a contract agreement, usually with a bank, specifying the amount of currency, at and exchange rate on the date of contract (Madura, 2003). Forward markets have contracts tailored to the company’s need and delivery date: these contracts are self-regulated contract without security deposit (Madura, 2003). Future market contracts have standardized size and delivery date and require small security deposit.

Many companies were hedging before the last rescission  hit the world market. They bought foreign currencies or stocked raw materials for their industry.  What do you think happened to those companies? Should they hedge now since the world market is picking up?

Madura, J. (2003). International financial Management (7th ed.). Mason, Ohio: South-Western.

Stulz, R. (2001). Rethinking risk management. In The new corporate finance: where theory meets practice (pp. 411-27). New York: McGraw-Hill Irwin.

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Dubai…the brand name!

Two men walk past the Burj Dubai on Sunday, the eve of the world's tallest skyscraper's official opening.

Burj Khalifa (Burj Dubai)

Dubai was the dream land for many people because of the accelerated development and the strong commercial foundation the city made for itself. During the glory days, I checked with several clothing stores owners in the market and most of them said that they sell most of the displayed items in less than a week. The real estate market was booming to the point where the average price for an apartment was $2,700 per square foot!

The past 18 months were economically difficult for many investors around the world. Most of the motivational speakers and wise people tell us to look at the bright side of the matter and I would like to talk about it in this blog. Every summer we hear about the forest fire in many locations around the world. The good thing about this natural forest fire is eliminating the plantation over growth that consume the available resources. The forest would start from zero to grow new plants and trees to become a newly build forced (and maybe better than before). The good thing about the economic recession is eliminating the weak businesses and overwhelming initiatives in the world market. The strong businesses will buy the weak and mismanaged business to rise again as a stronger and well-integrated enterprise.

Proposed height of the Burj Dubai compared to ...

Image via Wikipedia

Until the end of 2007, Dubai was a brand name known around the world similar to many famous cities. Like many brands, Dubai had a major setback during the recession that exposed many fragile businesses and their supporting services. The chain effect of losing some businesses dragged down with it the good and strong companies in Dubai. Last year Dubai celebrated Atlantis Hotel opening by spending on the fireworks more than what China spent on the last Olympics opening. Dubai celebrated the world tallest building “Burj Dubai” yesterday quietly to the point where some observers equated the event with Dubai’s economical situation, just “Quiet”.

Last summer I took advantage of a competitive offer made by Kuwait Airways to stay at Atlantis hotel for a weekend. Economically, Dubai has a long way to go (minimum one year) to recover from the deep recession it is going through now. So this summer I recommend that you look for a good family vacation in Dubai were the prices are low and the service is excellent.

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